Kenya unlikely to pay punishing premium for debut Eurobond – analysts

By: Kanika SaigalPublished on: Friday, October 25, 2013

Although Kenya missed out on low nominal yields for emerging market issuance before the May to August rout, the country will not pay through the nose for credit-specific risk, despite the recent terrorist atrocities at Westgate Mall, its twin deficits and large size of the deal at $1.5 billion to $2 billion, say analysts. However, the country faces an uphill battle to issue before the Christmas holidays.

Kenya, despite missing out on low nominal
yields that emerging and frontier markets benefited from at the
start of the year, will not be forced to pay a heavy penalty
for its upcoming debut Eurobond issue, thanks to familiarity of
the credit and pent-up demand for African sovereign issuance, say
experts.

Kenya will be paying more for the Eurobond now
than they would have if they issued earlier this year when
nominal yields were low, but they wont be paying a
premium for issuing now because the curve for all frontiers has
risen, says Stuart Culverhouse, chief economist and head
of research at Exotix.

Another emerging market (EM) strategist adds:
I would assume Kenya to pay between 7.2% and 7.5% for the
issue, depending on what US treasuries get up
to.

For the past couple of years, frontier and EM
issuers have profited from excess liquidity as a result of the
Federal Reserves quantitative easing programme and the
lack of high-yield debt instruments in developed markets.
However, talks of Fed tapering, and a strengthening dollar, could
put pressure on yields to widen.

The market remains risk-on, as Fed tapering
has been postponed as the shutdown in the US put things out of
kilter, says the EM strategist. Kenya has a window
of opportunity now  not as good as what they would have
paid if they had issued in April, for instance, but better than
what they might have achieved if they had gone to the market in
the summer.

Rwanda, the first country in the East African
Community to issue a Eurobond, issued a $400 million 10-year
deal at the lowest end of the yield guidance at 6.875% in April
 despite the fact the issue was out of range for
JPMorgans EM bond indices, which could have triggered
additional demand from index trackers and encouraged secondary
market liquidity.

In July, Nigeria issued a $500 million five-year bond at
a yield of 5.375% and a $500 million 10-year bond with a yield
of 6.625%  also on the tight end of guidance.

Although appetite for African exposure is not as strong as seen in
the spring, benchmark deals during the past year are still
trading at tighter levels compared at issue.

Ghanas Eurobond, due for maturity in 2023, is
yielding at 7.8%, compared with 8% at launch, and Zambias
2022 bonds are priced at 5.5% versus 5.65% when issued.
Nigerias 2023 Eurobond is priced lower at 5.5%, compared
with 6.625% at issue, but this is, in part, due to its stronger
credit rating.

Kenya is a strong, familiar story and is
probably the highest-profile frontier market yet to issue a
Eurobond, says Culverhouse. Because of this, I
dont think that any changes in perception after the
terrorist attack at Westgate would do little to affect pricing
either.

Potential
risks

Kenyas finance
minister Henry Rotich

Kenyas finance minister Henry Rotich is closer than ever to issuing its first Eurobond,
with Standard Bank, Barclays and JPMorgan reportedly acting as
lead arrangers for a $1.5 billion to $2 billion issue. There
are, however, still some pricing risks attached to the bond,
warn analysts.

Its a big debut, says Culverhouse.
There could be a question of whether the debt will be too
big to service. If this comes into play, they could expect to
pay closer to the 8% mark.

Indeed, factors about debt management could take the
price higher, says Culverhouse: Kenya remains vulnerable with
smaller FX reserves than its neighbours, and twin
current-account and budget deficits.

Kenyas track record has shown that it
has been able to finance the twin deficit, says the EM
strategist. So investors can be confident in the
issue.

But the Eurobond will have a wider spread
compared to Nigeria, for instance, because of the
countrys macro fundamentals. They might have to pay a
slight premium because of the deficit, but it wont be out
of control.

Culverhouse points out: If Kenya were to issue a $2 billion Eurobond
at 8%, around 1% of annual budget revenue would be needed to
service the debt. Kenyas debt interest per annum is about
$1.3 billion and the Eurobond, with these metrics, would
account for about 12% of this  about $160 million. Debt
repayments would be manageable.

Indeed, timing could also be an issue. Unless
Kenya issues in the first week of December, it might be best
for them to wait until the new year, says Culverhouse.
Issuing during the holidays means that people will be
away and demand could be low. They could end up paying a
premium for that.

Add Your Comment

All fields are compulsory

All comments are subject to editorial review as we are subject to the same regulations adhered to in publishing our own content. For this reason, your comment may not be live immediately, or may not be published.

Magazine

The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies Policy before using this site.